The euro is down after Europe woke up to news that Moody’s cut Portugal’s credit rating by four levels to junk status below investment grade, capping last week’s rally in risky assets. An interest rate increase by China fueled the euro selling environment.
Euro zone Q1 GDP came in as expected at 0.8% and German factory orders handily beat expectations but markets were firmly focused on yesterday’s downgrade by Moody’s, the first major rating agency to label Portugal’s credit rating below investment grade. The euro quickly fell and retraced 50% of its move that began with last Monday’s low. Worries of contagion into Ireland and Spain have also dragged down European equities with the DAX down -0.30% and the FTSE 100 lower by -0.78%. The pressure is on the euro a day before the ECB is expected to hike interest rates by 25 bps tomorrow as the ECB once again attempts to prove its inflation fighting reputation. But now growth is lagging in the euro zone and yesterday’s PMI data showed a slowing services sector, a negative for the euro. EUR/USD initial support is 1.4340 with the next test at the rising support line from the May 23rd low which comes in today at 1.4140.
The other story this morning was the 25 bps interest rate increase by the People’s Bank of China, the central bank’s third rate hike this year. The one-year deposit rate now stands at 3.50% and the one-year lending rate was also lifted 25 bps to 6.56%. Talk of a hard landing in China is possible as inflation pressures continue to rise. In May inflation registered 5.5% though China has made it a goal to take inflation back down to 4%. The interest rate hike could weigh on the dollar block currencies (AUD, NZD) that rely on China for much of its growth.
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